The tax-exempt market traded softer every session this week as buyers refused to put money to work at such high prices.
Theselloff throughout the week left yields as much as 11 basis points weaker, yet market participants were waiting for yields to back up even more.
“Munis had been relatively outperforming Treasuries for most of the week so it was only a matter of time before we had a day munis took it on the chin,” said Dan Toboja, vice president at Ziegler Capital Markets, referring to rising yields Thursday. “The bright news for munis was as sellers cheapened their offers bid sides began to emerge, albeit at wider spreads.”
In the primary, Toboja said, “underwriters are not bringing enough paper to market to force customers to raise cash to put in for deals. Customers aren’t feeling pressure to jump in with ratios on the full side. The end result is the frustrating status quo we see.”
In the largest deal of the primary, Bank of America Merrill Lynch priced $950 million of New York City general obligation bonds. Yields were raised as much as nine basis points from the first retail pricing.
“The primary market was a bit of a struggle this week as we saw one of the largest loans, the NYC GOs, cut after what appeared to be a disappointing retail order period,” said Peyton Studebaker, director of trading at Caprin Asset Management.
“There do not appear to be overwhelming balances of new issues floating around the street, but it was also a lighter week from a supply standpoint,” he said. “If this softer tone continues, and supply were to pick up, we could see a significantly more negative sentiment emerge in the market. Fortunately, as summer nears, the supply horizon seems very manageable over the near-term.”
In the secondary market, average daily trades and par value this week were higher than last week. Average daily trades this week rose to 38,717, from last week’s 38,309. Average par value traded was $10.766 billion, up from $10.616 billion.
On Wednesday, Federal Reserve Chairman Ben Bernanke sent a chill through the muni market, said the Fed will continue buying $85 billion a month of bonds, though it may start tapering the pace of purchases in a few months. In a testimony to the Congressional Joint Economic Committee, Bernanke said removing monetary policy accommodation now could halt the recovery.
“Volatility in the Treasury market appeared to push muni participants to the sidelines,” Studebaker said. “The move to higher yields in Treasuries after Federal Reserve Chairman Ben Bernanke’s comments caused 10-year muni-to-Treasury ratios to decline well into the 90% range, and make municipals appear somewhat expensive relative to the 100%-plus ratios in recent months.”
Weaker secondary trading may also be a result of traditional muni investors putting money to work in other, relatively cheaper asset classes. “This year’s June reinvestment season may lack some of the conviction seen in years past as cash that would normally flow back into the asset class might be put to work outside of the tax-exempt space,” Studebaker said.
Through Friday, the 10-year Municipal Market Data yield increased eight basis points to 1.90% and the 30-year yield rose 11 basis points to 3.08%. The two-year yield increased one basis point to 0.29% for the week.
The Municipal Market Advisors 10-year and 30-year yields ended the week through Friday nine basis points higher to 1.97% and 3.19%, respectively. The two-year yield increased two basis points from the week to 0.35%.
Treasuries were mixed for the week. The two-year yield increased one basis point to 0.26% as of Friday morning. The benchmark 10-year yield rose six basis points to 2.01%. The 30-year yield was unchanged for the week at 3.17%.